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Lloyds Shakes Off Brexit Concern as Lending Margins Increase

  • Bank’s pretax profit beats estimates as revenue rises
  • Lloyds boosts 2017 guidance for lending net interest margin

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Lloyds Banking Group Plc isn’t getting bruised by Brexit so far.

Britain’s largest mortgage bank boosted its target for lending margins this year, even amid record-low U.K. interest rates introduced in the wake of the nation’s vote to leave the European Union. Net interest income rose 1 percent to 2.93 billion pounds ($3.8 billion) in the first quarter, topping most analysts’ estimates.

Lloyds has about 97 percent of its business in the U.K., tying the bank’s fortunes to the performance of the British economy as the nation negotiates its divorce from the EU. The company is expected to return to full private ownership within weeks, more than eight years after it was bailed out during the financial crisis.

“They’re the best positioned bank right now operating in the U.K.,” said Joseph Dickerson, an analyst at Jefferies International Ltd. in London with a buy rating on shares. “It was a very strong quarter.”

The stock rose 3.6 percent to 69.84 pence at 8:14 a.m. in London trading. Although the lender had underperformed its major rivals over the past 12 months, the U.K. government has been selling down its stake and was able to recover all of the 20.3 billion pounds it spent rescuing Lloyds in 2009.

The net interest margin, the difference between income from lending and the cost of funding, rose to 2.80 percent in the first three months of the year from 2.68 percent in the fourth quarter. The bank said the margin will remain close to that level for 2017, up from its previous guidance of above 2.7 percent.

Pretax profit for the first quarter almost doubled to 1.3 billion pounds, compared with 654 million pounds a year ago, the London-based bank said in a statement on Thursday. Excluding exceptional charges, Lloyds reported a pretax profit of 2.08 billion pounds, beating the 1.96 billion-pound average estimate of five analysts compiled by Bloomberg News.

Charges for past misconduct and litigation are still hurting the bank’s bottom line. Lloyds set aside 350 million pounds in the first quarter for mis-selling payment protection insurance and a 100 million-pound provision linked to a fraud scandal at its HBOS commercial lending business, charges it had previously warned investors about. The lender also set aside 100 million pounds for other retail conduct matters, which it didn’t explain further.

Impairment Drop

With mortgage income facing potential erosion from low rates, tough competition and a slowing housing market, Chief Executive Officer Antonio Horta-Osorio is pushing to expand in higher margin credit-card business through the acquisition of Bank of America Corp.’s MBNA U.K. operation. That strategy comes with risks, as the Bank of England expressed concern over spiraling consumer debt.

The results show “our ability to respond to a challenging operating environment,” Horta-Osorio said in the statement. “The U.K. economy continues to benefit from low unemployment and reduced levels of indebtedness.”

Of key importance to the bank is whether impairments for souring loans will rise after years of low provisions as the BOE keeps interest rates on hold. Loan impairments fell to 127 million pounds from 149 million pounds in the first period of 2016, beating estimates from UBS Group AG analyst Jason Napier for an increase to 250 million pounds.

The firm’s core Tier 1 capital ratio, a measure of financial strength key for investor payouts, rose to 14.5 percent before dividends from 13.8 percent at the end of December. Lloyds said it would hit the higher end of its target for generating between 170 and 200 basis points of capital a year, helping bolster expectations for rising dividends.

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